Integration and collaborationHow businesses can capitalise on ASEAN’s growth story

Simon Constantinides, HSBC’s Regional Head of Global Trade and Receivables Finance for Asia Pacific, explains why ASEAN-based companies, as well as those further afield, are well positioned to capitalise on the opportunities made possible by regional trade flows and the unique resources of each member state.

The distraction of China’s growth has seen much of the world overlook one of the greatest trading opportunities of the post-global financial crisis economy: ASEAN.

The region has exceptional potential, as collectively the 10 members of the Association of Southeast Asian Nations (ASEAN) comprise a market of more than 600 million people with a combined GDP of some

USD2.4 trillion1. In addition, the region offers sustainable economic growth, low manufacturing costs and a rising middle class who are hungry for the consumer experience.

A decade ago, the majority of Western companies that came to Asia identified China as the preferred option when setting up manufacturing facilities. They were encouraged by the nation’s competitive wages, developing infrastructure and the vast opportunities presented by its domestic market. However, this is beginning to change as Southeast Asian markets become more accessible and increasingly cost-competitive.

1 http://investasean.asean.org/index.php/page/view/about-the-asean-region/view/707/newsid/932/integrated-asean.html

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1 “What a globalising China means for ASEAN: Two-way benefits on the rise”, HSBC Global Research, August 2014

2 http://www.industryweek.com/finance/foreign-direct-investment-china-rebounds-53-2013

3 The Asean-5: Indonesia, Malaysia, Thailand, Philippines and Singapore4 http://focus-asean.com/foreign-direct-investments-china-focus-asean-25 http://www.asean.org/communities/asean-economic-community/item/industry-focus

6 http://www.asean.org/images/resources/Statistics/2014/SelectedKeyIndicatorAsOfApril/Summary table_as of 30Apr14_upload.pdf

7 http://www.asean.org/images/resources/Statistics/2014/ACIF 2013.pdf

In 2013, Foreign Direct Investment (FDI) into China increased by almost 10% year-on-year, reaching USD117.6 billion2. However, FDI into just the top five ASEAN economies3 for the same period overtook this figure for the first time in 2013 with a 7% jump year-on-year to USD128.4 billion4.

ASEAN trade, past to present

Since the association’s formation in 1967, economic growth throughout the region has been exponential. For instance, in 1975 manufactured goods made up around 18% of ASEAN exports. Yet by 1991 its share was around 63%5. Between 2010 and 2013, the association’s GDP grew by more than 27%6. Trade with China and India, which rose from a total of just under USD42 billion in 2000 to more than USD391 billion in 20127, contributed significantly to this rise.

Looking across the various member states, it becomes apparent that a key factor behind ASEAN’s success is its diversity:

• There are frontier markets like Cambodia, Laos and Myanmar that are largely untouched by foreign investors, but which manufacture low-value goods such as agri-commodities and export them elsewhere.

• Vietnam, which has now become a hub for textiles, garments and footwear.

• Malaysia and Indonesia, each with a huge commodities base, while the former has also become very strong on the technology front.

• Singapore, which houses high-value chain industries – including pharmaceuticals, IT and chemicals – and acts as the region’s financial hub.

As such, ASEAN boasts all stages of the value chain, which in turn has made it a highly competitive trading bloc. Furthermore, each member state has built up a competent labour force in their respective sectors.

Stemming from this, the trading opportunities for businesses from all corners of the region are remarkable. Not only can they look to trade with counterparties from neighbouring ASEAN states, but they can also capitalise on trade flows that carry goods to China, India and the rest of the world.

Indeed, the burgeoning growth of trade volumes between each member state has given rise to the proposed ASEAN Economic Community (AEC), which is due to commence in 2015. Among many other goals, the AEC aims to encourage inter-regional trade and investment, free movement of capital, and freer movement of skilled labour. Furthermore, it is hoped

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that the community’s formation will boost the region’s competitiveness within the global economy and thus expand on the trade and investment opportunities currently presented to the region.

In Indonesia, for instance, producers of commodities and other low-value goods could capitalise on the trade routes that carry coal from the archipelago to Japan and South Korea, which is eventually used to make steel. From the beginning to the end of its journey, the coal will pass through various ports. The movement of this coal is heavily reliant upon people and infrastructure, which could be used to help shift other commodities and manufactured goods along the same route.

Likewise, Malaysia’s particular expertise in manufacturing high-tech goods could encourage other industries that involve similar skill sets. This too provides opportunities for various manufacturers from other ASEAN states.

Trade facilitation

A key challenge associated with inter-regional trade is that member states are at vastly different levels of development and market sophistication. With regard to labour, some markets are less open to foreign workers than countries like Singapore. This is particularly challenging when companies are looking to upskill their staff, yet do not have the management in place to transfer knowledge and expertise. In the financial services industry, for instance, there are certain markets where it is very hard to find skilled workers, which has had a detrimental impact on the sophistication of banking services offered in such places. The same can be said for IT and other high-value chain industries, which means that unless certain countries modify their labour laws, these places will be unable to rise further up the value chain.

Infrastructure, too, plays a significant role in the facilitation of trade and investment, as without ports, railways, highways and airports, commodities, manufactured goods and people are simply unable to move elsewhere. Across ASEAN there are instances where infrastructure development has significantly led to GDP growth. Singapore is a fine example of this. However, there are countries where connectivity remains a big challenge. In Indonesia, infrastructure development cannot keep pace with the nation’s burgeoning economy, which causes bottlenecks in the supply chain. In addition, transportation costs are among the highest in Asia, which impacts the efficiency and profitability of trade. Frontier markets such as Cambodia, Laos and Myanmar are attractive to businesses because of their low-wage workforces, but the infrastructure needed to transport goods from these economies is greatly underdeveloped. In the wake of the Thai floods of 2011, companies have learnt that having just one plant in a particular destination exposes them to production risks. Corporations are therefore operating in multiple locations or are using several suppliers for the same goods to mitigate potential concentration risks.

Regulatory transparency and consistency of financial services are other areas required to facilitate trade. With regard to the former, markets need reporting systems and processes in order to guide companies on what they need to do to make trade and investment easy and hassle-free. Furthermore, ASEAN’s markets must enforce strict rule of law and bring their local regulations in line with one another. Without these, businesses cannot trade effectively throughout the region. Banks too must play their part in enabling businesses to achieve their growth ambitions. Apart from performing in a transactional capacity, they must also act as a voice for their customers when speaking to regulatory authorities. Banks must also ensure that they are governed to the highest of standards.

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Collaboration and future growth

All the above challenges can be overcome, irrespective of how large they may appear today. Nevertheless, it will take much collaboration between importers, exporters, service providers and government agencies to remove these hindrances.

The introduction of the AEC will also go some way to alleviating these challenges. With each member state promoting the free flow of goods and services, investment and capital, and skilled labour, many of the barriers that stand in the way of inter-regional trade will eventually disappear.

What is clear is that opportunities for ASEAN-based businesses are in abundance, and that these will grow further with the advent of the AEC. While vast openings are being created, companies will need to approach these new opportunities with some caution. A trade bank willing and able to work with regulators in order to make international trade and investment easier, and fully aware of the many pitfalls associated with particular economies, is an essential partner.

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For nearly 150 years HSBC has been where the growth is, connecting customers to opportunities. We combine extensive global reach, notable financial strength, and a long term commitment to our clients. In the rapidly developing ASEAN region, where we have had a presence in most of the member countries for more than 100 years, our deep understanding of local markets enables us to help clients realise their business goals. Whether it is trade finance, working capital, foreign exchange, cash or liquidity, HSBC provides the network and expertise businesses need to thrive.

For more information, visit www.hsbcnet.com

Mark Troutman Managing Director, Regional Head of Sales, Global Payments and Cash Management, Asia Pacific, HSBC Tel: (65) 9119 3712 E-mail: marktroutman@hsbc.com.sg

HSBC in ASEAN• HSBC Brunei, HSBC Chambers, Corner of Jalan Sultan/Jalan

Pemancha, Bandar Seri Begawan, BS8811, Brunei Darussalam

First established in 1947 in Bandar Seri Begawan, HSBC operates as both the central clearing bank appointed by the Brunei Association of Banks, and through a network of nine branches.

• HSBC Indonesia, World Trade Centre, Jalan Jenderal Sudirman, Kav 29-31, Jakarta 12920, Indonesia

HSBC started its operations in Indonesia in 1884 with the opening of its first office in Jakarta. Initially established to serve the important sugar trade, it has expanded its operations throughout the country with 24 branches across six cities: Jakarta, Bandung, Semarang, Batam, Medan and Surabaya.

• HSBC Malaysia, No. 2 Leboh Ampang, 50100 Kuala Lumpur, Malaysia

HSBC’s presence in Malaysia dates back to 1884 when the Hongkong and Shanghai Banking Corporation Limited established its first office in the country on the island of Penang, with privileges to issue currency notes. On 1 January 1994, HSBC became the first foreign owned financial institution to be localised, and together with a separate Islamic banking subsidiary licence, delivers services through 68 branches nationwide.

• HSBC Philippines, HSBC Centre, 3058 Fifth Avenue West, Bonifacio Global City, Taguig City, Philippines

HSBC has been operating in the Philippines since 1875 and is licensed to operate as a universal bank. As one of the oldest banks in the Philippines, HSBC offers a full range of banking and financial services. Together with its 100% ownership and control of a local savings bank now operating under the name HSBC Savings Bank (Philippines) Inc., HSBC has a combined total of 16 branches operating in key locations in Metro Manila, Cebu and Davao.

• HSBC Singapore, 21 Collyer Quay, #01-01, HSBC Building, Singapore 049320

Having first opened its doors in 1877, HSBC operates in Singapore as a full bank through nine branches, and has been awarded Qualifying Full Bank (QFB) privileges by the Monetary Authority of Singapore.

• HSBC Thailand, HSBC Building, 968 Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand

HSBC’s history in Thailand dates back to 1865, when the Bank appointed an agent in Bangkok. In 1888, a representative office opened in Bangkok, becoming the first commercial bank in Thailand. HSBC issued the country’s first currency note, guaranteed the Thai Government’s first bond issue, and underwrote the first offshore loan syndication to begin construction of the country’s railway system in the late 1890s.

• HSBC Vietnam, The Metropolitan, 235 Dong Khoi St. District 1, Ho Chi Minh City, Vietnam

HSBC first opened an office in Saigon (now Ho Chi Minh City) in 1870, operating for more than 100 years until 1975. In 1992, HSBC re-established its presence with representative offices in Ho Chi Minh City and Hanoi, and in 1995 opened its full-service branch in Ho Chi Minh City. On 1 January 2009, HSBC became the first foreign bank to incorporate in Vietnam, after gaining approval from the State Bank of Vietnam (SBV) to set up a Wholly Foreign-Owned Bank (WFOB). Now the largest, HSBC Bank (Vietnam) Ltd. delivers services through 18 branches and transaction offices.

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